Startup

Aug 30, 2007

One of the most common question people ask me is: "why do you think people will pay for your software when they can get it for free?". Just to put things in context, I'm working on an Eclipse based tool. Eclipse is free and many of the Eclipse plug-ins are free. People working in the Eclipse ecosystem are used to getting stuff for free. So, for me, this question becomes extremely relevant, even though there isn't a free tool that can do exactly what I offer.

I wrote a few posts in the past about giving software for free and the added costs of using free software, including:

A great post by Bob Walsh over at 47 Hats blog explains why you can still sell, even when your competition is giving it for free. It's worth reading (and I should add it's a good blog altogether).

Bob discusses ways of making yourself more competitive by reducing the Total Cost of Ownership (TCO) and by making your software and your site more approachable. The emotional side is a strong topic. I would have to add that, plainly, making your software cool is a great factor here. Take the iPod for example. Sure, you can get a cheaper player. But the thing is so freakin' cool. This is a stronger factor when you sell to consumers (B2C), but it will also help getting end-users on your side and eventually convincing the manager he/she is making the right buying decision.

Jul 27, 2007

Another example which popped into my head. Let's say you have a strong reference. Maybe an advisor that supports your product, a customer that said he/she will buy your product once it's available. Maybe you want to state your own achievements in order to show that "you know best". When you tell someone about this reference, do you need to explain?

If it was that successful and that strong, a name of a person/customer/product would be enough. They're successful, so there's no need to explain.

Something to think about when looking for references. And, it's also something to think about when developing your own career.

Jul 16, 2007

After writing the previous post regarding the "free edition" option, I felt there was some injustice about it. The bottom line was that it's practically impossible to get anything useful from having a "free edition" and that's not true. It does work in some cases. I wanted to explore these specific situations.

First, one of my main arguments was that it is a different product, aimed at a different market segment, so it will need it's own marketing efforts and it will not contribute to the marketing efforts of the main product. This claim is based mostly on the concepts described in Geoffrey Moore's "Crossing the Chasm". While I do think this is a great book, I also think that: (a) like most rules, there are exceptions and (b) the internet has changed the market. Especially evident is the long tail effects on the web as a consumer market.

Second, one may argue whether this is a different market segment to begin with. Well, there's no definite answer. In my opinion, it mostly depends on how you distinguish between your editions. For example, a CRM product with a free edition that handles up to 50 clients is probably targeted at a different segment. A photo site that offers extra space for subscription fee is probably targeting the same segment. If you are heading towards the same market segment, then your marketing efforts are joint, you stay focused on your market and it is more likely that you will see contribution to your overall sales.

Another point which I neglected in the previous post is web applications "free edition". Although I focused my research on classic software products, it's not very different when it comes to web applications. I think the key point to remember is that you will have much more users for the "free edition", thus, you will need more servers and bandwidth. As with classic software, providing a poor service (e.g. slower servers) to your free edition users will have a counter effect, so plan accordingly. And, reiterating the point, if this is a different market segment, this is exactly what "diffusing your focus" means.

Jul 15, 2007

A few years back, nobody would've thought about giving software for free. It is something I work for, I expect to get paid for my efforts, so why give it away? And then came the open source revolution and turned things around. Suddenly, giving a piece of software for free makes sense. Well, if not, why so many people are doing it? Let's face it, almost every piece of software you use today can be replaced with a free software. Operating system, office applications, anti-virus (for those less fortunate who use a virus prone OS), graphical editing tools... everything. True, it may not be of the same quality (as I claimed in my previous post), but it will be free.

Many great articles exist on the topic of open source development. But this is not my focus today. Saying that a software is "open source" does not mean it is given for free, although this is usually the case. Going for open source development is a bigger challenge, as the business model is usually less obvious. I have enough challenges at the moment, so I'm aiming at the good old business model of selling licenses.

I will offer a Free Trial for sure. It will be fully operational, not a demo. The big question is around the free edition. The free edition will provide some functionality and "lure" users into buying the full edition. Let's start with the pros and cons and summarize with some useful points to keep in mind when considering a free edition. I collected these from various articles I read on the subject and from several interviews I conducted.

Pros for giving a "free edition"

Instant Market - build an audience, fast. Take a look at SourceForge, possibly the biggest collections of open source projects. One of the great features of SourceForge is the ability to see download statistics for each project. In my area, for example, good tools can easily generate 5000 downloads a month with no marketing effort. I think many vendors in my area will be satisfied with these numbers (again, no marketing efforts). Especially for new projects.

People know they can get tools for free, so they look for free alternatives. In my previous company, it was very common to favor free and open-source solutions over paid ones. Many people today prefer getting a little less and pay nothing. It's not just about money: the difference between a $50 and $70 is $20. The difference between free and $20 is a great barrier of opening your wallet. In a large corporate, opening the wallet can be a huge hassle and tons of bureaucracy.

Free testing and feedback - people will test your software and report bugs. Most people expect less when they get a free edition, so you're not required to provide the same level of support.

Cons for giving a "free edition"

Efforts - it's another edition to release and maintain. It will involve effort for building and testing. People do expect some level of support, so be prepared to provide that. A "free edition" of low quality with no support will have the counter-effect on your sales.

Loosing potential paid customers - customers may be content with the free edition and may not see a strong reason to upgrade.

It will require marketing. Otherwise, you'll end up slip sliding into a dark corner. True, there are tools with 5000 monthly downloads on SourceForge, but there are 100 times more projects with 10 downloads a month or less... With a very limited audience, you'll miss the goal of marketing the full version and the whole effort will be in vain. The question: if this requires marketing efforts, why not invest them in the original product? Well, it is easier to market a free product. But then again, the free product is not the basis of your business model.

Are you attracting the audience from your targeted market segment? Relating to Geoffrey Moore's great book, "Crossing the Chasm", efforts should be focused on a limited market segment and penetrate the mainstream customers in this segment. However the people who download the free edition may not be of the same market segment. If it's a different segment, you'll need to struggle to reach mainstream with your free product as well. This, in turn, diffuses your focus from your main market, which is the basis of the business model.

Some key points to remember

Carefully consider the difference between the editions. Give too much and nobody will buy your paid edition. Don't give enough and nobody will use your free edition.

It's another product you're pushing to the market. It will require all the related efforts - development, deployment, support, marketing, etc. You're probably targeting a different market segment, so be prepared to conquer this segment.

It's difficult to estimate how this product will help the sales of your paid products. However, if you have limited resources, you may want to consider safer and cheaper means of marketing.

To sum up, there are many cases where the free edition missed it's target. There are examples where it did help create a reputation and establish market dominance. For me, it's still a possibility. It's very reasonable for me to start with a simple edition, give it for free and proceed to develop the full edition. However, to put bluntly, I need the cash. I cannot afford burning "fuel" without any income. I may offer a free edition, but it will be later on in the process.

Jul 05, 2007

How do I know that? For the last 4 years I was working in Amdocs on a single product called Amdocs Self Service. It's a platform for developing self service web applications which integrate to various back-end systems, specifically geared toward the Telecom industry. I designed the front-end framework of the product and some of the back-end as well. I was actively involved with at least 5 major product implementations and deployments at major Telcos, including AT&T and Vodafone. I personally trained at least 150 developers in this area and provided consulting to many more. Finally, I ended up as the chief architect (CTO) of the product and met with CTOs and architects from at least 10 major Telcos.

I've experienced the pain. I believe I know what needs to be done to fix it.

However, I will need to convince other people. Investors, potential partners and employees (not to mention customers, but let's leave that for now).Can I do that?

In the passing months, I've pitched my idea to various people and discovered that they can be categorized into mainly 3 groups:

Most technical people who experienced "enterprise development"
love it. It's easy to see why. Much like me, they experienced the pain and
believe that something can be done about it. My explanation sounds
reasonable and they see how it can improve their daily routines. It is just what they need.

It's very hard to pitch to non-technical people, as the idea is
very technical. Especially the competitive edge, which is as technical
as it can get. It's one of my most difficult challenges.

The
last issue is the tough one. I'm currently targeting potential
investors. The type of investment is more suitable for a private
investor - it's not enough money for a VC. While VCs usually have their
resident techie to evaluate potential projects, private investors mostly rely
on their own instincts. You may say that the burden of proof becomes
heavier. Either I find a truly technical investor (from the first
group, very rare) or I should bring with me enough credit to show that
my product has the market potential.

For that reason, my next step would be to perform market validation. I
will do so by conducting a survey among several potential customers which I can easily reach. I
will pitch my idea to people at different levels and gather their
feedback using an on-line survey. This seems to be the best I can do at
the moment.

I don't feel very comfortable with this way of market validation, from the following reasons:

From the investor perspective, the interesting people in the
survey will be those who will eventually make the buying decision. The
managers. Group 2 above. A hard sell.

The "nice effect" - I'm a nice person, I'll be meeting with people
on my network which are also nice. We're all talking hypothetically,
since there's no product yet. They want to be supportive, so why
shouldn't they be? Although this will yield "nice" answers, it may
steer me away from the truth and hang a question mark over the results.

Having that said, I don't see better alternatives. It's important to
be aware of the above negative effects. It may help reducing them when
conducting the survey.